* Annual forecasts lifted above expectations on improved sales
* Currency assumptions for H2 look conservative - analysts
* Longer term unclear on ebbing stimulus, Hyundai competition
* Q2 operating profit 65.54 bln yen vs consensus 42 bln yen
* Shares fall 1.9 pct before results vs sector's 1.7 fall
TOKYO, Oct 27 (Reuters) - Honda Motor Co nearly tripled its annual profit forecasts and more upside may be ahead, with the company taking a conservative view on the yen and with the effect of easing government incentives unknown.
Honda, the world's seventh-biggest car maker, has weathered the industry turmoil that drove two U.S. automakers to bankruptcy this year better than many as its profitable and dominant motorcycle business cushioned the blow.
Sales by the maker of Honda Civic cars have also turned up thanks to government sales incentives such as the United States' cash-for-clunkers programme. That has helped Honda and others gradually lift production levels from a nadir earlier this year.
"The strong results and conservative views on the second half and currency rate assumptions will be positive for Honda's stock price," said Fumiyuki Nakanishi, manager at SMBC Friend Securities in Tokyo. "The stock will probably surge tomorrow."
Honda lowered its average dollar assumption to 85 yen from 90 yen for the October-March second half of its financial year to next March, lower than around 92 yen in trading on Tuesday. A weaker dollar crimps Honda's earnings in yen terms.
Honda bumped up its global car sales forecast for the full year by 3.3 percent to 3.40 million units from 3.29 million.
Still, some voiced caution about the longer-term outlook as the effect of government stimulus schemes fades and competition from rivals in South Korea heats up.
"I would like to wait a little bit more to see the effect of the end of government incentive programmes before talking about Honda's outlook for the next year on," said Kazutaka Oshima, CEO of Rakuten Investment Management in Tokyo.
He added that Japanese makers were losing their quality advantage that could have made up for the price gap with their South Korean rivals such as Hyundai Motor Co, which he called Honda's "real rival".
Hyundai, the world's No.4 automaker by sales in the first half of this year when combined with affiliate Kia Motor Corp last week beat forecasts with a record quarterly net profit that analysts said posed a threat to Japanese automakers.
FORECASTS NEARLY TRIPLED
Honda on Tuesday nearly tripled its operating profit outlook to 190 billion yen from 70 billion yen for the full year to March 31, 2010.
The seventh biggest car maker by first-half sales also nearly tripled its net forecast to 155 billion yen from 55 billion yen.
That topped consensus forecasts from 21 brokerages for Honda's operating profit for the full year to March 2010 to hit 139 billion yen, with net profit of 113 billion yen.
For July-September, Honda's operating profit fell 56 percent to 65.54 billion yen ($712 million) from 148.85 billion yen in the second quarter last year as sales volumes fell and the yen strengthened against the dollar.
The result beat an estimate of 42 billion yen in a poll of five analysts by Thomson Reuters I/B/E/S.
Net profit, which includes its earnings from the red-hot Chinese market, was 54.04 billion yen, against 123.32 billion yen last year.
Rivals Toyota Motor Corp and Nissan Motor Co are also expected to report improved second-quarter earnings next week, but Honda is seen making the most profit by far for the full year, partly due to its more flexible operations, fewer exports from Japan and a slim car line-up.
Still, auto executives are concerned about volatile currency moves and repercussions on demand when government stimulus measures around the world end.
Honda's sales in Japan, for one, have been powered by generous tax reductions on hybrids such as its new Insight model, and executives have said sales could suffer when the incentives run their course.
Shares of Honda gained 3.9 percent during the second quarter, outperforming Tokyo's transport sector subindex, which was flat. In contrast, Hyundai shares jumped 50 percent during the same period.
Honda ended down 1.9 percent at 2,845 yen on Tuesday before the results were announced, against the transport sector's 1.7 percent fall. (Reporting by Chang-Ran Kim; Writing by Chris Gallagher; Editing by Rodney Joyce)